Kraft Heinz Co. 2021 Form 10-K Summary
Business context and reporting period
The Kraft Heinz Company manufactures and markets branded food and beverage products globally, including condiments and sauces, cheese and dairy, meals, meats, beverages, coffee, and grocery products. The filing covers the 52-week fiscal year ended December 25, 2021, compared primarily with the 52-week fiscal year ended December 26, 2020.
Operations were reported through the United States, International, and Canada segments. Management expects to combine the United States and Canada into North America and report two segments, North America and International, beginning in the second quarter of 2022.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $26.042 billion | $26.185 billion | (0.5%) |
| Organic net sales | $23.714 billion | $23.293 billion | 1.8% |
| Gross profit | $8.682 billion | $9.177 billion | (5.4%) |
| Gross margin | 33.3% | 35.0% | Down 1.7 percentage points |
| Operating income | $3.460 billion | $2.128 billion | 62.6% |
| Operating margin | 13.3% | 8.1% | Up 5.2 percentage points |
| Net income attributable to common shareholders | $1.012 billion | $356 million | 184.5% |
| Diluted EPS | $0.82 | $0.29 | 182.8% |
| Adjusted EPS | $2.93 | $2.88 | 1.7% |
| Adjusted EBITDA | $6.371 billion | $6.669 billion | (4.5%) |
| Cash flow from operations | $5.364 billion | $4.929 billion | 9% |
| Capital expenditures | $905 million | $596 million | 52% |
Organic net sales growth was driven by 2.3 percentage points of pricing, partly offset by 0.5 percentage points of unfavorable volume and mix. Reported sales reflected a 3.5 percentage-point unfavorable impact from divestitures and a 1.2 percentage-point favorable foreign-currency impact.
- United States net sales declined 3.1% to $18.604 billion; organic net sales increased 1.6%. Segment Adjusted EBITDA declined 7.2% to $5.157 billion.
- International net sales increased 6.5% to $5.691 billion; organic net sales increased 3.1%. Segment Adjusted EBITDA increased 0.7% to $1.066 billion.
- Canada net sales increased 6.5% to $1.747 billion, primarily from currency; organic net sales declined 0.4%. Segment Adjusted EBITDA increased 7.8% to $419 million.
At December 25, 2021, cash and cash equivalents were $3.445 billion, including $867 million held by international subsidiaries. Total long-term debt, including the current portion, was $21.801 billion versus $28.300 billion at the prior year-end. The company had no commercial paper outstanding and no borrowings under its revolving credit facility. The Senior Credit Facility provided revolving commitments of $4.1 billion through July 2023 and $4.0 billion through July 2025. The company was in compliance with its debt covenants.
The company paid $1.959 billion of dividends in cash during 2021 and declared a first-quarter 2022 dividend of $0.40 per share. Walmart represented approximately 22% of 2021 net sales.
Material changes versus the prior comparable period
- Reported sales declined modestly because of divestitures and lower volume/mix, while pricing produced organic sales growth.
- Gross profit and Adjusted EBITDA declined despite higher pricing because inflation increased commodity, logistics, procurement, manufacturing, and other supply-chain costs.
- Reported operating income and net income improved substantially primarily because impairment losses fell to $1.634 billion from $3.413 billion in 2020.
- 2021 impairment charges included $318 million of goodwill impairment and $1.316 billion of intangible-asset impairment, including approximately $1.24 billion related to the retained Kraft brand following the Cheese Transaction.
- Interest expense increased to $2.047 billion from $1.394 billion, primarily due to a $917 million loss on extinguishment of debt associated with 2021 tender offers, redemptions, and open-market repurchases.
- The company completed the sale of certain global nuts assets for approximately $3.4 billion and certain global cheese assets for approximately $3.2 billion of cash plus license-related consideration. It also acquired Assan Foods and BR Spices.
- Operating cash flow increased to $5.364 billion, while investing cash flow was positive $4.038 billion due primarily to divestiture proceeds. Financing cash usage increased to $9.344 billion, mainly because of debt repayments and extinguishment costs.
- The company settled the previously disclosed SEC investigation for a $62 million civil penalty, which was paid in 2021.
Guidance, outlook, management commentary, risks, and unusual items
- Management expects commodity and supply-chain cost inflation to remain elevated through at least 2022 and plans to mitigate it through pricing actions and efficiency gains. Management cautioned that pricing could reduce market share and that mitigation may lag the cost increases.
- Capacity constraints and labor shortages affected service levels and the ability to meet demand. The company expects approximately $1.0 billion of 2022 capital expenditures, primarily for capacity expansion, cost improvement projects, maintenance, and technology.
- The company expects to pay approximately $620 million of cash taxes related to the Cheese Transaction during the first half of 2022.
- Management expects approximately 750 additional positions to be eliminated in 2022 as part of restructuring programs. The 2021 restructuring expense was $84 million.
- In January 2022, the company completed the acquisition of an 85% stake in Just Spices for approximately $243 million. The planned Hemmer acquisition, with estimated consideration of approximately $211 million at year-end exchange rates, was expected to close in the first half of 2022 subject to customary conditions and regulatory approvals.
- COVID-19 continued to support retail demand relative to pre-pandemic periods but negatively affected some foodservice operations. A prolonged decline in away-from-home demand could cause additional impairment charges, particularly for Canada Foodservice.
- Future goodwill and brand impairment remains a significant risk. Reporting units with 20% or less excess fair value had $28.3 billion of goodwill, while brands with 20% or less excess fair value had $21.3 billion of carrying value.
- Other principal risks include commodity and energy price volatility, inflation, retailer concentration and private-label competition, foreign exchange, substantial indebtedness, credit-rating risk, cybersecurity, regulatory and litigation exposure, climate-related costs, product liability, and changing consumer preferences.
- The company reported effective internal control over financial reporting as of December 25, 2021, and the independent auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Whether pricing actions can offset inflation without causing sustained volume, mix, or market-share deterioration.
- The underlying performance of Adjusted EBITDA and cash flow excluding divestiture proceeds, impairment effects, debt-extinguishment costs, and other adjustments.
- The sustainability of the $1.6 billion of 2021 impairment charges and the sensitivity of the remaining goodwill and brand balances to discount rates, growth assumptions, and demand.
- Debt maturities and refinancing needs, including approximately $709 million of long-term debt principal maturities in 2022 and the company’s below-investment-grade ratings from Fitch and S&P.
- The timing and cash impact of the approximately $620 million Cheese Transaction tax payment, planned 2022 capital expenditures, acquisitions, restructuring, and dividends.
- The effects of the 2022 segment reorganization and required interim impairment testing expected in the second quarter of 2022.
- Developments in pending securities and shareholder derivative litigation, for which the company stated that potential losses could not be reasonably estimated.